The most important thing we don't do enough....
The budgeting process is the roadmap to business success!
Ask an entrepreneur about the secret to their success and you’re likely to hear about innovation, teamwork, engagement and vision. While all that may be true and all those attributes may be necessary, every successful business starts with something more basic than that: a budget. Budgeting may not be sexy, but it’s essential to understanding where you want to go and what you need to do in order to get there. Done right, your budget will become one of your most reliable tools for managing your day-to-day operations, anticipating future needs, navigating the unexpected, and gauging attainment of short- and long-term goals.
Let’s take a closer look at what a budget is, the basic of putting a budget together, the advantages of having one, and the potential vulnerabilities associated with skipping this important step.
What is a Business Budget?
At its most basic, every budget is a plan for the management of available funds and anticipated expenses. When it comes to business, a comprehensive budget becomes a critical financial tool that can be used for formalizing and documenting expectations, placing controls on spending, preparing for the unexpected and hoped-for growth, and for gauging success. Having a budget in place allows you to control and reduce debt, to make purchasing and operational decisions, to manage cash flow, and to allocate resources.
How can it do all those things?
By thoughtfully including every single function of the business in its preparation. The key to a well-crafted budget is that it leaves nothing out of its calculations. It plans for the expected and the unexpected, the hoped-for accomplishments and the most-feared pitfalls.
We’ll start by looking at what to include in your budget to ensure that it has covered every aspect of your business.
What to Include In Your Business Budget?
Developing your operating budget requires breaking down all the different aspects of your business in order to forecast your costs. Though each organization will have different elements based upon whether they sell a product or a service, whether they manufacture or resell and other variables, almost all will have some kind of sales function, as well as the expenses required to support that function, as well as overhead expenses. Your budget should essentially be a forecast that is based on sales history and projections combined with input from different stakeholders within the organization, economic conditions, your marketing plans and costs, and more. If you have production costs, they will be based upon your sales team’s forecast and added to direct materials costs and increased labor costs in order to calculate the expense needed to meet inventory needs, as well as any overhead budget such as the rent or lease of existing and/or additional warehouse and production faction costs additional warehouse costs, utilities costs, and equipment costs.
In addition to these expenses there are additional costs associated with the selling of your product and the administration of your business that need to be included. Do you pay your salespeople commissions? If your sales volume is expected to increase then you need to anticipate paying your team more money and paying more in administrative costs to fulfill orders, collect payments, arrange for deliveries, and even attend to customer service issues such as returns.
Once these individual expenses are delineated in your budget, each can be used to plan, to identify areas where cost cutting can be done or where greater efficiencies can be realized. You can also quickly assess whether the income that is expected from the forecasts provided by sales will cover the expense that is required to support it. If not, then pricing will need to be adjusted. If there is plenty of surplus, then plans can be made for what to do with the profits in order to fund future growth.
If you’re sitting down to make a budget and you’re concerned that you might overlook a critical category, the good news is that once you are faced with an expense, you’ll be able to add it in the future. Still, to help you get off to as comprehensive a start as possible, here are some of the most common budget expense categories involved in running small-to-medium-sized businesses:
· Advertising and marketing. This means everything from social media to billboards, from business cards to branded promotional items.
· Financial fees. This includes expenses for maintaining your business bank account, your business credit card, or to process credit card payments.
· Business meals and entertainment. The costs of taking clients or potential clients out to lunch or gift them tickets to shows or sporting events.
· Computer hardware and software. Whether inventory control software or the price of scanners, desktop computers, printers, laptops, and more.
· Independent contractor fees.
· Dues and subscriptions.
· Employee benefits, including education, healthcare insurance, dental and life insurance, childcare.
· Insurance for your commercial property, business vehicles, general and professional liability, workers compensation.
· Interest you pay on business loans and credit cards.
· Legal and professional fees, including attorneys and accountants and bookkeeping.
· Office expenses, from lease costs to maintenance and repairs, as well as furniture and supplies.
· Postage and shipping costs, as well as stationary and forms.
· Salaries, wages, and commissions
· Raw materials for production, as well as any other supplies needed to operate your business
· Taxes (including income tax property tax, sales tax, excise tax, and payroll tax), licensing costs, business registration costs.
· Costs for business-related travel, from airfare and baggage charges to hotel fees.
· Utilities for office or warehouse space
· Vehicle expenses, including gas and tolls
How Does Having A Comprehensive Budget Help?
Once you have your business budget in place, it will need occasional fine tuning and adjustments to reflect differences in the business environment and your product line. New (or forgotten) expenses may arise and need to be added, greater cost efficiencies may lead to lower production expenses or adjustments in commission structure or number of employees will require that numbers be changed, but once you have the basic budget structure in place, moving forward and amending it will be fairly simple. But now that you have a budget in place, how does it help?
As you build your budget you will realize that it is essentially a formalized forecasting tool. It takes into account every cent that goes out and every dollar expected to flow into your business over a specific period of time. As such, it not only helps you appreciate your business’ cash flow better – and make plans for where shortfalls may occur – but it also will provide you with a tool for identifying where predictions of either costs of income have been wrong, allowing you to take quick corrective action in a specific area.
Here are just a few of the advantages to having a formal, comprehensive budget in place.
· Cash flow management – At its most basic, a business budget accomplish predicts cash receipts and disbursements over a specified period of time. Though these metrics will change with business growth, with slow periods, and with unexpected interruptions or events, a budget will give you an immediate sense of when you’ll be most at risk for low cash reserves, perhaps driving the need for a short-term loan or for holding off on adding to inventory. It likewise may guide you to take actions to incent faster payments from clients, or for the best time to invest in equipment, infrastructure, or an expanded workforce.
· Drives resource allocation and other decisions – The information provided by a budget will provide you with the data you need about the best allocation of your resources. If your budget isn’t meeting the mark for sales it may be time to put more into your marketing campaign. If your production costs are too high you may want to find new sources or order in larger quantities. Likewise, surpluses in income can be used to help executives invest in additional resources
· Comparing past-to-present performance –A quick analysis of your budget year-over-year, in terms of both revenue and expenses, will yield invaluable information about growth (or lack of growth) and what worked or requires fine tuning – or a complete overhaul.
· Gauge whether objectives have been met – Perhaps most important of all, when you have a budget in place based on complete information and thoughtful forecasting, you can use it to gauge the quality of your information and whether you are meeting your goals and objectives. Each aspect of your business’ strategy is represented within the budget, and when actual performance either falls short or exceeds expectations you will be able to compare what actually happened to what was projected within the budget and adjust your strategy, whether that means greater anticipation of risk or one-off expenses, expanding production capabilities to meet increased demand, eliminating or increasing specific product lines, or any other type of shift to ensure your business’ health.
Building Your Business’ Budget
Creating a comprehensive budget helps to avoid the unexpected and provides you with a clearer picture of where your business is and where it can go in the future. It prevents getting caught flat-footed and reveals strengths, as well as weaknesses that require attention. For assistance in reviewing your business’s needs, contact PPS solutions and enlist the help of a Fractional Finance team. Our guidance has helped countless business owners and entrepreneurs to strengthen their strategy.
Contact us today at www.ppsfinance.com to set up a time for a consultation.